Dairy Price Supports: Still Milking the Public

by Michael McMenamin

Michael McMenamin, a contributing editor of Inquiry magazine, is the co-author of Milking the Public: Political Scandals of the Dairy Lobby From LBJ to Jimmy Carter (Chicago:
Nelson-Hall, 1980). He is a partner in the Cleveland law firm
of Walter, Haverfield, Buescher & Chockley.

Executive Summary

Last December it seemed a safe enough observation that
the dairy lobby was the biggest loser when the Agriculture
and Food Act of 1981 was approved by two votes in the House
after earlier passing the Senate by the far more comfortable
margin of 65-31.[1]

It is not uncommon, however, for a legislative victory
to dissolve before the victor has a chance to savor it. The
Reagan administration discovered this anew in May 1982 when
it admitted that despite its successful efforts in the 1981
Farm Bill to keep dairy price support levels from rising, the
continuing overproduction of dairy products for 1982 was expected to cost the government a record high $1.94 billion.
Or as Agriculture Secretary John Block put it in his press
conference in May, American taxpayers were being charged at
the rate of $250,000 an hour to pay for surplus dairy products
which American consumers were unwilling to purchase voluntarily.[2]

As a consequence, Block asked Congress to give him the
authority to reduce dairy price supports in 1982 by as much
as $1.10 per hundred pounds (cwt.) from the current level of
$13.10 per cwt., which would be frozen at that level for the
rest of the year. This is far more than the Reagan administration ever asked for in the 1981 Farm Bill, let alone the compromise to which it eventually agreed.

Even so, although already a failure at reducing the cost
to the government for subsidizing dairy farmers, the 1981 Farm
Bill may have a long-range impact. What happened in 1981 was
that for the first time since the program began in the 1940s,
milk price supports were severed from any connection with
"parity," which is the index for determining price supports
based on the relationship of farm prices to prices of non-
agricultural goods and services during the pre-World War I
period of 1910 to 1914. Instead, the 1981 Farm Bill provided
for a series of modest fixed price support increases during
each of the next three marketing years. For the rest of the
1982 marketing year, which began in October 1981, the price
remained at $13.10 per cwt. where it essentially has been,
with one exception, since October of 1980. It would have
increased to $13.25 per cwt. in October 1982; $14.00 per cwt.
in October 1983; and $14.60 per cwt. in October 1984.[3]

This abandonment of parity is symbolically important
because most people, including congressmen, do not understand
the concept. It sounds so fair and equitable that setting
price supports at some level less than 100 percent of parity
seem to imply a sacrifice by farmers. Nothing, of course,
could be further from the truth. Parity is an agricultural
fable based upon a near-legendary period that no politician
living today remembers. According to the accepted folk wisdom, 1910-1940 was a golden age for farmers where crops were
plentiful, prices were high, and bankruptcies few. Government
price supports for agricultural commodities -- dairy or otherwise -- were pegged to a percentage of what farm products
would purchase in non-farm goods at that time. In reality,
parity is simply a crude political semanticism used to mask
the manner in which Congress sets the level of federal welfare benefits for farmers, welfare which does not necessarily
go to the smallest or poorest farmers. Of the $2 billion
paid out in price supports in 1978, USDA studies indicate
that almost half of the figure went to the largest 10 percent
of farms participating.[4]

Ironically, even though the 1981 Farm Bill eliminates
parity for dairy farmers and sets milk price supports in stark
dollar amounts, the administration had not set out with that
goal in mind. What the administration had backed was the
Senate version of the farm bill, passed in September 1981,
which provided for milk price supports at a minimum of 70
percent of parity, adjusted on an annual basis.[5] This was
a significant improvement but, more importantly, the bill
also provided for no increases in price if USDA projections
on net purchases of dairy products in the coming year exceeded $750 million. Given what USDA projections were in the
fall of 1981, there in fact would have been no increase in
October 1982 from the current price of $13.10 per cwt.[6]

The dairy lobby knew that 1981 would involve "give-backs";
and it tried to salvage from the 1981 Farm Bill a guaranteed
minimum price support of at least 75 percent parity, which
was itself a drop from the 80 percent of parity it had extracted from Congress in 1977 with the eager assistance of
the Carter administration. The House Agriculture Committee
naturally gave the dairy lobby what it wanted -- it always
does. But the full House failed to adopt the Committee's
recommendation. The dairy lobby then lowered its sights again
and supported a bill, passed by the House, calling for milk
price supports at 72.5 percent of parity, with annual increases thereafter as long as the government surplus dairy supplies
did not exceed 3.5 billion pounds a year.[7]

The Senate bill would probably have frozen milk price
supports at the present level of $13.10 for several years
with an adjustment unlikely until October 1983. The practical effect of the House bill would have been an increase in
October 1983 of more than $1.00 per cwt. A compromise was
arranged in the conference committee; the House conferees
agreed to the minimum 70 percent of parity in the Senate bill,
and the Senate conferees agreed to drop their provision for
eliminating the annual increase if USDA projections for net
dairy purchases exceed $750 million for the coming year. The
compromise would have cost approximately $150 million more
than the original Senate bill approved by the Reagan administration.[8] It was more than the administration was willing
to accept. Reagan threatened a veto of the entire farm bill
unless the conference committee made changes in the dairy
section. The bargaining which ensued produced the modest
guaranteed increases in each of the next three years in milk
price supports discussed earlier but eliminated the connection between price supports and parity. As a consequence, it
is quite likely that dairy price supports, which are presently effectively below 70 percent of parity, will continue to
be below 70 percent given the modest, albeit guaranteed, increases scheduled for October 1982 and October 1983, increases
which are now jeopardized by the latest Reagan initiative.

Will taxpayers and consumers benefit in any substantial
way from Reagan's newest proposal to reduce dairy price supports? In other words, will reducing price supports actually
save the government money, and will consumers pay any less
for milk?

Whether the government will save any money obviously depends upon total government expenditures on price supports in
1983 and thereafter. Certainly the government will spend
less with price supports at $12.00 per cwt. than it would
with $13.10 or higher. But whether it spends more on price
supports in 1983 than it does in 1982 is still an open question. Even if Congress skips the October 1982 increase of
15 cents per cwt. and grants the Secretary of Agriculture the
authority to reduce price supports to $12.00 per cwt. (or
some other figure less than the current $13.10 per cwt.),
there are no assurances this will save the government any
money. USDA estimates show that a $12.00 per cwt. price support level could save the government as much as a billion
dollars in fiscal '83.[9] But similar USDA estimates in February 1982 were about $400 million too optimistic by May.
Any group making a $400 million mistake in only four months
should not find a $1 billion error beyond its capacity.

The reasons why USDA makes such mistakes in forecasting
are not difficult to understand. America is blessed with
enormously efficient and productive dairy farmers who respond
with alacrity to the incentives offered by their government.
Consider the reaction of a dairy farmer in early 1981 when
asked how he would respond to a dairy price support reduction:

Oh, we would just increase our output
to lower our unit cost and to keep up our
money flow. Everything we buy will not go
down, so we have to have more revenue if
we're going to continue. Your marginal producers may get out, but your professionals,
your good operators, will just increase milk
output.[10]

Not only is the government going to save very little
with surplus dairy purchases, even with lowered price supports, but consumers are going to pay just as much for milk
at the supermarket. The reason for this is simple -- that is
the way government has set things up. The explanation as to
why and how things got that way is a bit more complicated.